Are Wisconsin taxes too high?

As residents scramble to complete their taxes by this year's deadline, April 17, there are two contrasting messages coming from Wisconsin's corporate community on the subject of taxes and economic prosperity.

One of those messages dominates political discussion. It's easy to state, easy to understand, and easy to put on bumper stickers: Cut My Taxes.

Its chief proponent is Wisconsin Manufacturers & Commerce (WMC), the Madison-based big-business lobby that for years has focused its legislative agenda on plaintive appeals for a reduced tax burden.

WMC spends more money lobbying legislators than any other group in Wisconsin. It supplements its lobbying with a steady supply of press releases, op-ed offerings and campaign support for anti-tax politicians.

The power of this message can be seen in WMC's push against the 2006 reelection of state Sen. Bob Jauch (D-Poplar) in northwestern Wisconsin. Large, pinkish billboards appeared in northern forests, declaring in stark letters: 'Sen. Bob Jauch: Higher Taxes! Fewer Jobs!' (P.S. Jauch won.)

The alternative view is rarely heard inside the state. Its key proponent is Forward Wisconsin, a public-private group that woos out-of-state businesses to locate here.

Forward Wisconsin's message is very different from WMC's. 'Wisconsin's business taxes are among the lowest in the country,' its Web site brags. 'Wisconsin's business-friendly attitude is reflected in positive business tax changes that have been made in every biennial legislative session since the early 1970s.'

Who's right? WMC, complaining throughout the state about 'Wisconsin's burdensome tax climate'? Or Forward Wisconsin, boasting to outsiders that 'Wisconsin business taxes are low ' lower than those in 35 other states'?

The answer is important, and not just to figure out which business group deserves a gold star for accuracy. Underneath these contrary assessments of Wisconsin's business tax climate are divergent views on what it takes to sustain a vibrant state economy.

One view focuses on cutting taxes. WMC is forthright about which taxes it wants to see eliminated or reduced: the individual income tax, sales tax, estate tax, business equipment tax, capital gains tax, property tax, corporate income tax. Are there any it missed?

The alternative view, meanwhile, focuses less on taxes than on the vital public structures that taxes support. These include physical things like roads, schools and sewers, as well as less tangible items like unemployment benefits, clean lakes and public safety.

Realtors, for example, embrace this alternative view. Their income derives from selling houses, a task made easier by the ready availability of quality public structures. The Wisconsin Realtors Association puts it like this: 'We understand and appreciate that what breathes life and hope and happiness into our 'homes' is the quality of our neighborhoods, jobs, schools, parks, services, medical care and transportation.'

In other words, people who take one view conclude that taxes are part of what makes Wisconsin a great place to live, while others declare that only relief from taxes can make living in Wisconsin tolerable again.

But the divide between these two camps is not just a matter of perception. There are ways to measure the state's tax burden relative to other places that allow an honest assessment to be made. And that's a discussion worth having.

Highs and lows

As in most states, Wisconsin's state and local government revenues come mainly from four sources: property taxes, sales taxes, individual income taxes, and fees and charges. These categories account for more than 90% of all state and local revenue in Wisconsin.

Compared with other states, Wisconsin has above-average residential property taxes and individual income taxes. In 2004 (the latest year for which nationwide data are available), property taxes in Wisconsin took 4.3% of total income, the eighth highest ratio in the nation.

That same year, Wisconsin's individual income tax took 3.0% of total income, the ninth highest rate among the states.

So, home-owning wage-earners have good reason to feel pinched by those two taxes. And those two ' the residential property tax and individual income tax ' are the attention-getters in conversations about taxes.

For many tax-cut advocates, the story ends there. As WMC president Jim Haney has said, 'Our tax burden remains among the highest in the nation. We have ranked in the top 10 for decades. It's a chronic problem that needs to be solved.'

But there's more to the tax story. Much more.

The second biggest revenue source for state and local government is sales taxes, accounting for 3.4% of total income. But Wisconsin is among the most lightly sales-taxed states, ranking 38th.

Wisconsin's basic sales tax rate of 5.0% is lower than that of most states (including all those that border it). And while much of the economy has shifted from goods to the service sector, the sales tax remains isolated in the 20th century. Virtually none of the services that now make up the majority of economic transactions are subject to the sales tax.

The fourth largest public revenue source is fees and charges, ranging from college tuition to auto registration to library fines. These account for 3.1% of total revenue, which ranks 28th among the states.

So the fuller picture shows that Wisconsin's tax burden is high in two areas: residential property taxes and individual income taxes. But Wisconsin has among the nation's lowest sales tax and is in the middle on fees.

Taxes for us are not bad'

Edward Zore, chief executive of Northwestern Mutual Life Insurance Co., the state's largest financial institution, made a dramatic speech in February. He was addressing fellow executives at a meeting of Milwaukee 7, a new southeastern Wisconsin regional economic development initiative.

Zore said Northwestern Mutual Life, the largest private employer in the state's largest city, 'would bypass Milwaukee today if it were choosing to relocate from elsewhere,' the Milwaukee Journal Sentinel reported. His comments sent a chill through the city's civic elite.

But Zore, a Milwaukee native, stressed his company's intent to stay put and support the city, where its offices anchor the downtown lakefront. Nevertheless, he said, from the perspective of a national site-selection consultant, Milwaukee 'at best' would fall in the middle of the pack.

What is Zore's beef? High taxes? Hostile business climate? Overregulation? Nope.

'Zore repeatedly downplayed Wisconsin's tax burden as one of the impediments,' the newspaper reported. Indeed, he told the gathering, 'Taxes for us are not bad.'

But Zore did grouse about a shortage of college graduates. That's a comment about the need to improve the educational system, a tax-supported public structure.

Zore's message, pooh-poohing taxes, is at odds with WMC's. Which leaves one to wonder: Just what are the underlying facts about business taxes in Wisconsin?

The national accounting firm of Ernst & Young publishes an annual review of state and local business taxes. As accountants to many of the state's biggest corporations, Ernst & Young is well qualified to estimate the corporate sector's tax payments. And as an advocate for business, the firm is not disposed to underestimate the corporate tax contribution.

Ernst & Young provides two methods for calculating Wisconsin's business tax rank compared with other states. One calculates total business taxes as a percentage of total personal income. The other takes total business taxes as a percentage of private-sector gross state product ' that is, the total value of private business activity.

In 2005, Wisconsin ranked 31st among the states using the first method and 33rd using the second. This approximates Forward Wisconsin's claim, based on data from the Federal Reserve Bank of Boston, that Wisconsin's business taxes are 'lower than those in 35 other states.'

Indeed, if corporations in Wisconsin were paying taxes simply at the U.S. average, this would annually generate nearly one billion dollars in additional revenue for state and local governments.

This would be enough to reverse statewide service cuts, which range from bus routes and library hours to road repair and school staffing. Or it would more than plug the state's $1.6 billion two-year budget gap.

Breaks galore

The available data suggest Forward Wisconsin is correct and WMC incorrect in their conflicting claims about the state's business tax burden. The reasons for Wisconsin's relatively low business-tax burden are numerous, and merit a closer look.

For starters, all manufacturing machinery and equipment is exempt from property taxes. The Wisconsin Department of Revenue estimates that about $12 billion worth of property is tax-exempt under this law. If taxed at the state's average tax rate, this would generate about a quarter-billion dollars in new annual revenue.

Business computers are also exempt from property tax, under a definition of 'computer' broad enough to include automated bank tellers and computerized cash registers. In this case, the state annually reimburses local governments approximately $80 million in lost revenue.

Then there are the business services untouched by the sales tax. A 5% sales tax on advertising would generate more than $100 million a year, the Department of Revenue estimates. A sales tax on computer consulting would yield more than $130 million. A sales tax on accounting would produce nearly $60 million. And so on.

Finally, there are numerous breaks from the corporate income tax. These include scores of individual business-assistance programs that give tax credits for such things as research ($18 million annually) and investment in so-called development zones (about $14 million).

The growth of these business-tax exemptions is clear from looking at long-term trends. Thirty years ago, residential property accounted for half of all state property taxes. Today, homeowners pay 70% of all property taxes, as the business contributions have dropped.

Twenty years ago, 10% of the state's tax revenue came from the corporate income tax. Today's share is barely half that.

The picture is even starker when it comes to the income tax. The state Department of Revenue reports that most Wisconsin businesses pay zero corporate income tax. For example, of the 4,275 companies that filed returns in 2003 showing annual receipts of more than $100 million, 62% paid absolutely no corporate income tax.

Obtaining company-specific tax information is cumbersome, expensive and time-consuming. Among other things, the state requires requesters to provide the corporation's name and mailing address exactly as they appear on the corporation's tax return, which is itself a confidential document.

But a 14-month process of requesting data on hundreds of companies doing business in Wisconsin yielded surprising results. Among the companies that in 2003 paid no income tax are some big names: McDonald's, Merck, Microsoft, PepsiCo, Kimberly-Clark, Johnson Controls (the largest Wisconsin-based firm), Kohl's and Snap-on Tools.

The S.C. Johnson family of companies is especially noteworthy. Emerging from the Johnson Wax company, based in Racine, are a handful of large firms, including Johnson Financial Group, Johnson Bank, Johnson Outdoors, JohnsonDiversey, along with the original S.C. Johnson & Son. From 2000 through 2004, not a single one of these firms paid a cent in Wisconsin corporate income tax.

There's nothing sinister in these firms' tax avoidance. It's smart business. It's legal. It's part of the Welcome Wagon that Wisconsin brings out for big business. It's part of the pitch that Forward Wisconsin uses to lure business.

But WMC refuses to concede the point. WMC chairman Terry D. Growcock has attacked what he called 'excessive corporate taxation.' WMC president James Haney has called for 'eliminating the corporate income tax.'

How do the firms behind WMC fare when it comes to the corporate income tax? Tax data from 2004 were obtained for 22 firms with executives sitting on WMC's board of directors. Twelve of the 22, including Growcock's Manitowoc Company, paid zero state corporate income tax.

The danger of tax cuts

So if Wisconsin's corporate community is a relatively light player when it comes to supporting the state's critical public structures, who is paying for them?

The answer is clear from a Department of Revenue 'tax incidence' study, released in 2004 with no fanfare and virtually no public notice. It concludes that, as a share of income, the burden of state and local taxes falls most heavily on the state's middle class, especially lower- and moderate-income married homeowners.

For example, the poorest homeowners (incomes below $15,600) paid more than 14% of their income in state and local taxes. The richest homeowners (incomes above $70,000) paid about 10% of their income in state and local taxes.

In other words, Wisconsin residents who do what society tells them to do ' get a job at the bottom of a career ladder, get married, buy a home ' are slapped with the heaviest tax burden.

It would be wrong to infer from the contrast between WMC and Forward Wisconsin's positions that Forward Wisconsin would be comfortable with higher taxes. But any sober analysis does suggest that WMC's policy objectives are not based on economic fact.

WMC's goals are straightforward: to reduce the size of state and local government, and thus reduce taxes. It's an ideological position more than an economic one.

Yet putting this agenda into place risks undermining the services and amenities that make Wisconsin a good place to live and to do business. Consider the assets that Forward Wisconsin says are the foundation for economic growth: 'highly developed infrastructure,' 'an educational system among the best in the country,' 'abundant, well-managed natural resources,' 'excellent ground, rail and air transportation with deep-port water accessibility.'

These are the very structures supported by the tax revenue WMC would restrict.

Some business leaders know better. Timothy Sheehy, president of the Metropolitan Milwaukee Association of Commerce, recently opposed major route cuts for Milwaukee's bus system. In the process, he neatly summed up the problem with WMC's philosophy. Said Sheehy, 'You can't cut your way to prosperity.'

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